The modular ligand-binding domains of steroid receptors have been widely used to generate protein chimeras that are ligand dependent for activity. In a similar manner, we generated a series of conditionally active JunD and c-Fos proteins by fusing their carboxyl (COOH)-terminal ends with a COOH-terminal fragment of the human estrogen receptor (ER) that contains the ligand-binding domain. JunD-ER (DER) and Fos-ER (FER) chimeras with an intact leucine zipper and basic region exhibit hormone-dependent activation of activator protein-1-directed transcription in transient expression assays. One of these fusions, DER, has been examined in detail to determine its mechanism of action. Results from immunoprecipitation experiments with extracts from DER and Fos transfected cells demonstrate that Fos and DER readily form heterodimer complexes. Surprisingly, the formation of Fos:DER heterodimers, and possibly DER homodimers, is estrogen-independent. However, gel shift assays clearly demonstrate that DNA binding to AP1 sites by Fos:DER heterodimers or DER homodimers is estrogen-dependent. Moreover, in the absence of estrogen, the DER protein is an effective inhibitor of Fos-mediated transactivation, and this effect is reversed by the presence of estrogen. Our results indicate that the DER protein is a direct, hormone-reversible inhibitor of Fos and that estrogen controls the conditional positive or dominant negative activities of DER at the level of DNA binding to AP1 sites. Accordingly, clonally derived fibroblast cell lines that stably express the DER protein exhibit reduced entry into the S phase of the cell cycle when quiescent cells are serum stimulated in the absence of estrogen. This is in contrast to the estrogen-treated controls. These results support the hypothesis that AP1 is important for cell cycle progression and provide a unique approach for examining the role of AP1 in this process.